Lake Shore Bancorp(LSBK) - 2020 Q1 - Quarterly Report

PART I - Financial Information Item 1. Financial Statements The company's total assets grew to $628.3 million by March 31, 2020, a 2.9% increase from year-end 2019, while net income for Q1 2020 decreased 18.6% to $731,000 due to a $500,000 increase in loan loss provision, with $480,000 attributed to COVID-19 impacts Consolidated Statements of Financial Condition As of March 31, 2020, total assets increased 2.9% to $628.3 million, driven by a $15.3 million rise in cash and $2.5 million in net loans, alongside a 3.7% increase in total deposits to $501.2 million and a 1.2% rise in stockholders' equity to $83.8 million Consolidated Balance Sheet Highlights (Unaudited) | Financial Metric | March 31, 2020 ($ thousands) | December 31, 2019 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Cash and Cash Equivalents | 45,539 | 30,289 | 50.3% | | Loans receivable, net | 473,354 | 470,816 | 0.5% | | Total Assets | 628,326 | 610,869 | 2.9% | | Total Deposits | 501,199 | 483,476 | 3.7% | | Total Liabilities | 544,495 | 528,029 | 3.1% | | Total Stockholders' Equity | 83,831 | 82,840 | 1.2% | Consolidated Statements of Income Net income for Q1 2020 decreased 18.6% to $731,000 from $898,000 in Q1 2019, primarily due to a 566.7% increase in provision for loan losses to $500,000, despite a 7.9% growth in net interest income to $4.9 million Q1 2020 vs. Q1 2019 Income Statement (Unaudited) | Metric | Three Months Ended Mar 31, 2020 ($ thousands) | Three Months Ended Mar 31, 2019 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | 4,896 | 4,538 | 7.9% | | Provision for Loan Losses | 500 | 75 | 566.7% | | Non-Interest Income | 455 | 589 | -22.8% | | Non-Interest Expenses | 3,998 | 4,003 | -0.1% | | Net Income | 731 | 898 | -18.6% | | Basic and diluted EPS | $0.12 | $0.15 | -20.0% | Consolidated Statements of Cash Flows For the three months ended March 31, 2020, the company experienced a net increase in cash and cash equivalents of $15.3 million, primarily driven by $16.2 million in net cash from financing activities, offset by $2.3 million used in investing activities Cash Flow Summary (Unaudited) | Activity | Three Months Ended Mar 31, 2020 ($ thousands) | Three Months Ended Mar 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | 1,386 | 303 | | Net Cash Used in Investing Activities | (2,319) | (6,780) | | Net Cash Provided by Financing Activities | 16,183 | 6,832 | | Net Increase in Cash and Cash Equivalents | 15,250 | 355 | Notes to Unaudited Consolidated Financial Statements The notes detail accounting policies, including the adoption of CARES Act provisions for TDR and the deferral of CECL adoption, while also disclosing a $480,000 additional loan loss provision due to COVID-19, $103.1 million in loan deferrals, and $20.3 million in PPP loan applications - The company elected to adopt provisions of the CARES Act, which allows it to not apply troubled debt restructuring (TDR) accounting to loan modifications related to COVID-19 for qualifying borrowers[22][24] - The effective date for adopting the new Current Expected Credit Loss (CECL) standard (ASU 2016-13) has been deferred to January 1, 2023[25][27] - The projected economic impact of COVID-19 resulted in an additional $480,000 provision for loan losses for the quarter, primarily due to adjustments in qualitative factors to account for economic uncertainty[46] - As of May 11, 2020, the company had executed principal and interest payment deferrals on 219 loans with outstanding balances of $103.1 million in connection with COVID-19 relief[71] - The company is participating in the SBA's Paycheck Protection Program (PPP) and, as of May 11, 2020, had processed approximately 282 applications for up to $20.3 million in loans[109] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic, which led to a $425,000 year-over-year increase in the provision for loan losses and a corresponding 18.6% drop in net income to $731,000 for Q1 2020, with responses including $103.1 million in loan deferrals and PPP participation, while net interest margin declined 18 basis points to 3.42%, and the bank remains well-capitalized with a Community Bank Leverage Ratio of 12.85% Recent Market Conditions and Pandemic Response The company responded to COVID-19 by implementing social distancing, promoting digital banking, offering payment deferrals for 219 loans totaling $103.1 million, identifying $57.0 million in loans to at-risk industries, and actively participating in the SBA's Paycheck Protection Program (PPP) Loan Modifications by Type (as of May 11, 2020) | Loan Type | Number of Loans | Balance Outstanding ($ thousands) | | :--- | :--- | :--- | | Commercial real estate | 86 | 82,393 | | Residential, one- to four-family | 79 | 10,163 | | Commercial business | 30 | 8,495 | | Home Equity | 22 | 2,032 | | Consumer | 2 | 9 | | Total | 219 | 103,092 | Exposure to 'At Risk' Industries (as of March 31, 2020) | Industry Type | Balance Outstanding ($ thousands) | % of Total Loans Outstanding | | :--- | :--- | :--- | | Retail (non-essential) | 17,713 | 3.7% | | Eating and Drinking Establishments | 16,040 | 3.4% | | Hotels/Accommodations | 11,276 | 2.4% | | Construction Trades | 8,202 | 1.7% | | Dental/Medical Practices/Gyms | 3,731 | 0.8% | | Total | 56,962 | 12.0% | - The company is participating in the SBA Paycheck Protection Program (PPP), processing 282 applications for up to $20.3 million in loans as of May 11, 2020[131] Comparison of Financial Condition Total assets grew 2.9% to $628.3 million by March 31, 2020, driven by increased cash and net loans, while total deposits rose 3.7% to $501.2 million, and non-performing loans increased 12.4% to $4.0 million, representing 0.84% of total net loans - Total assets increased by $17.5 million, or 2.9%, from December 31, 2019 to March 31, 2020[142] - Total non-performing loans increased by $439,000, or 12.4%, to $4.0 million at March 31, 2020, primarily due to an increase in non-performing residential and home equity loans[148] - The allowance for loan losses increased to 1.01% of total net loans, up from 0.88% in the prior year period[149] Comparison of Results of Operations Net income for Q1 2020 decreased 18.6% to $731,000 due to a $425,000 increase in loan loss provision to $500,000 from COVID-19 uncertainty, despite an 11.1% rise in net interest income to $6.3 million - Net income decreased by $167,000, or 18.6%, to $731,000 for Q1 2020 compared to Q1 2019[153] - The provision for loan losses increased to $500,000 in Q1 2020 from $75,000 in Q1 2019, with the increase primarily due to adjusting qualitative factors for the uncertain economic impact of the COVID-19 pandemic[161] - Net interest margin decreased by 18 basis points to 3.42% for Q1 2020 from 3.60% for Q1 2019, impacted by a decrease in the average yield on interest-earning assets[141] Liquidity and Capital Resources The company maintains strong liquidity with $109.5 million in FHLBNY borrowing capacity and elected the CBLR framework, reporting a 12.85% CBLR as of March 31, 2020, which deems the bank well capitalized - The Bank elected to be subject to the new Community Bank Leverage Ratio (CBLR) framework, which was set at 9.00% for Q1 2020[180] - As of March 31, 2020, the Bank's CBLR was 12.85%, deeming it to be in compliance and considered well capitalized[181] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Lake Shore Bancorp, Inc. is not required to provide these disclosures - This section is not required as the Company qualifies as a smaller reporting company[183] Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[184] - No material changes to internal control over financial reporting were identified during the quarter ended March 31, 2020[185][187] PART II - Other Information Risk Factors This section updates risk factors, highlighting the significant and uncertain economic impact of the COVID-19 pandemic, including potential declines in demand, increased loan delinquencies, declining collateral values, higher loan loss provisions, and pressure on net interest margin - The primary updated risk factor relates to the COVID-19 outbreak and its potential adverse effects on the company's financial condition and operations[189] - Specific risks from the pandemic include: * Decline in demand for products and services * Increased loan delinquencies, problem assets, and foreclosures * Decline in collateral value, especially real estate * Potential for further increases in the allowance for loan losses * Reduction in net interest margin due to near-zero federal funds rates * Increased cybersecurity risks from remote work[190][196] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the company repurchased 26,900 shares of common stock at an average price of $14.00 per share under an existing plan, with 70,139 shares remaining available for repurchase as of March 31, 2020 Q1 2020 Stock Repurchase Activity | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2020 | - | $ - | | February 2020 | 8,800 | $15.46 | | March 2020 | 18,100 | $13.28 | | Total Q1 2020 | 26,900 | $14.00 | - As of March 31, 2020, 70,139 shares were remaining to be repurchased under the existing stock repurchase program[194] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and XBRL interactive data files - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906, as well as XBRL data files[197]